PINNACLE CAPITAL?

In its Q2 earnings release, PNK disclosed that it took a $23m write-down of its investment in ASCA common stock. To my knowledge, this is the first time the holdings were disclosed. Management should spend more time running casinos than trading stocks. From the chart it doesn’t look like they’ve done either particularly well.

PNK reported Adjusted EBITDA a little below formal expectations which is not a shocker. Of course, Adjusted EPS exceeded GAAP EPS by a wide margin. I’m actually not too concerned with the EBITDA miss. The stock is very cheap, the assets are generally of high quality, and their markets are attractive. My issue with PNK continues to be their capital deployment decisions. The ASCA purchase was just one more example. Whether the stock was purchased as an investment or the precursor to an acquisition (probably a little of both), the decision was poor. Hindsight is crystal but paying a higher multiple than its own to acquire similar assets with little strategic value is not a shareholder friendly maneuver. Luckily, the credit markets bailed them out.

In past posts, I’ve highlighted the attractiveness of a PENN/PNK combination. PENN is the best steward of shareholder capital in gaming and not surprisingly, they are the only company with liquidity. That is not by accident. PENN manages the company for good times and bad. Complimentary assets, cross-marketing opportunities, and built in growth are all important potential benefits to PENN in buying PNK. Most importantly, however, would be the instant value creation of Peter Carlino making better ROI decisions with PNK’s significant resources.

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